DAN ATKINSON: Go on Monsieur Hollande, push the big red button

A low-level currency war has been simmering away since the autumn. The growing fear now is that it is about to go nuclear.

Were this to happen, what would be the fallout for the UK and sterling?

Cast in the role of Dr Strangelove last week was the perhaps improbable figure of French President Francois Hollande, although most observers seemed to miss this.

Currency war: French President Francois Hollande is being cast in the role of Dr Strangelove

After he told the European Parliament
that the eurozone ‘must have an exchange rate policy’, there was much
‘clarification’ to the effect that this did not mean interference with
the independent European Central Bank.

Which
was odd. Because Article 219 of the European Union treaty allows
eurozone finance ministers, in consultation with the European
Commission, to devise an exchange-rate policy and fix a target for the
euro.

The ECB would have
to set interest rates to suit this policy unless it could argue that to
do so would be inflationary. Thus, the independent central bank would
be independent no more. This is the nuclear option.

As
with most currency wars, this one results from everyone trying to
devalue at the same time (although denying that they are doing any such
thing).

With the
central banks of the eurozone, America and Japan committed to
potentially unlimited support for their respective economies and with
the Bank of England having mused last month on the desirability of a
weaker pound, it is widely assumed that all concerned are trying to
export their way back to strong growth via a lower exchange rate
deliberately caused by excessive domestic money creation.

Doubtless the Group of 20 finance ministers’ meeting in Moscow later this week will publicly deplore such behaviour.

Hollande’s beef, meanwhile, is not that this is happening, but that the eurozone is proving less than adept at devaluation.

Ironically,
the widespread view that the worst of the eurozone crisis has passed
has helped to cause just the appreciation in the euro that Hollande
dislikes.

With
sterling’s safe-haven status thus diminished and doubts growing as to
whether Britain can keep its AAA credit rating, the pound has gone in
the opposite direction, losing about 3.5 per cent of its value against a
basket of world currencies since New Year’s Day.

Were
devaluation the elixir of trading success, UK business would have the
world at its feet. Funnily enough, what remain of British manufacturing
exports tend to be high value and less sensitive to price increases.

This
minimises the benefits of devaluation while leaving in place the big
disadvantage, which is costlier imports, leading to higher inflation.

So
let’s assume we prefer to regain our safe-haven status and strengthen
once more against the single currency. In that case, eurozone
politicians need to push the big red button.